The Basics

Q. What is a net lease?

A. A net lease (sometimes referred to as a bond or bondable lease) is similar to a bond issued by the Lessee and held by CRIC Capital or another Lessor. A net lease transaction can create significant short and long term financial and tax advantages for the business.

Also, under the net lease, the Lessor owns the property, while the Lessee keeps full control over the operation and use of the real estate, pay rent, and assume the obligations, risks, and costs of maintaining the property.

Q. Why should I consider net leasing for my business?

A. A company that uses its own capital to invest in real estate is diverting funds from its primary business. Unless there are no opportunities within its core business, it is hard to justify this use of its capital. A net lease transaction can free up needed capital and create significant short and long term financial and tax advantages for your business. Contact CRIC to learn more.

Q. What is the difference between a net lease transaction and a sale-leaseback transaction?

A. In a sale-leaseback transaction the Lessee owns the property immediately prior to the transaction, sells the property to the Lessor, and simultaneously leases it back from the Lessor.

In a net lease transaction, the Lessee does not own the property before entering into the lease. Instead, the Lessor buys the property from a third party and then net leases it to the Lessee.

The most important difference is that, under a sale-leaseback, if the Lessee wants to preserve the financial benefit of “off-balance sheet" treatment of the transaction, the Lessee cannot have a “continuing involvement” in the property. A continuing involvement includes an option by the Lessee to purchase the property or to retain a residual interest in the property.

Q. How does CRIC Capital’s net lease differ from a conventional lease?

A. One significant difference between a CRIC Capital net lease and a conventional lease is that rents paid under a bond net lease are usually lower than those under a conventional lease.

Under a net lease, the Lessee assumes the obligations, risks, and costs of maintaining the property. Therefore, the right to terminate the lease is contingent upon certain mechanisms designed to balance the rights and obligations of the two parties. Contact CRIC to learn more.

Q. Why is a CRIC Capital net lease transaction better for my business than direct mortgage financing?

A. The CRIC Capital net lease transaction has several advantages over direct mortgage financing.

First, in the CRIC Capital net lease transaction the Lessee receives 100% funding of the real estate. None of the business’ cash has to be invested in acquiring the property. Under a traditional mortgage arrangement, the business can typically finance only up to 80% of the cost or value of the real estate and must fund the balance in cash.

Second the Lessee can deduct all rent payments, including the rent allocable to the land. With mortgage financing, only the interest portion (not the principal) of the debt service is deductible plus depreciation of the improvements (but not the land). Moreover, since thirty-nine year depreciation is generally required for real estate, the value of the depreciation deductions is relatively low.

Third, as a result of the 100% rent deduction, the after-tax cost is usually much less than the after-tax cost of conventional mortgage financing.

Fourth, since the Lessee will not have to show any increase of indebtedness on the balance sheet, a net lease transaction will significantly upgrade the company’s financial statements. Contact CRIC to learn more.

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